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Big Hedge Fund Whacked - And Warm Feelings
One of the biggest leveraged hedge funds in the world got hit with a 2x4 during the 4th Q. This fund has a mixed bag of assets, but was heavily exposed to big FX positions.
The fund made a big “bet” recently when they went short EURYEN. This turned sour in a very big way; the EURYEN moved an incredible 14 big figures against them in just 60 trading days.
Street players, who know of this currency spec, refer to it as a “Size” position. At the end of Q3, it came to a lumpy short $40B. There were rumors that the fund added to the short during the Q (not confirmed yet). But even if the book was kept static, the mark-to-market loss comes to $5+B. That’s serious money to anyone.
Note: The short EURYEN book is looking terrible for this fund. The new Japanese Prime Minister is forcing a devaluation of the currency. The Japanese Central Bank is doing its best to achieve that devaluation. It’s possible that the fund will have to cover the short. If so, it could turn that “paper” loss into a cash loss.
I think the well-paid managers of the fund are kicking themselves in the ass over this speculation. They got creamed on this stinker, and this could be just the beginning of the losses.
Adding to the carnage was a monster sized bet short EURUSD. Last reported, this mega-position was $220B short! It’s possible that this number is now close to one-quarter trillion. It was a good Q for the EURUSD, and that means a bad Q for the fund. The 6+ big figure move up in the Euro versus the dollar translates into a paper loss of a staggering $11b!
All in, the losses from FX come to $16.5B. The fund has reserves of about $50b, so the quarterly swing is not a crisis, but it’s an eye-opener. 30+% of those reserves went out the window in one Q. Wow!
The fund in question has a strong capital base and loyal investors. But the management will have to explain to those investors how it managed to lose such a large percentage of its “cushion” in such a short period of time. Those investors will, no doubt, ask the very pertinent question: “Why is the fund making such big FX bets?”
Management is also going to have to address the issue of leverage – this fund is now running at 10 to 1. The high level of leverage, and the mega billions involved (much of which is tied up in derivatives), makes this fund a high risk/return player. Investors will have to ask themselves, “Do we still want to be on this roller coaster?”
So who is it that is running such a big FX book? And who are the investors that are on such a wild ride?
That would be the Swiss National Bank. The “investors” are the Swiss people.
I know, I know. Central Banks aren’t hedge funds, and they can’t take losses because they can always print more money. I respond to this by saying that the SNB is acting very much like a leveraged hedge fund. It's making currency “bets” with the people’s money. It's taking some very big risks. In an attempt to diversify one risk, they are just adding different risks, and that effort is backfiring.
Like the US Fed, the SNB sends its annual profits back to the people (Treasury in USA, Cantons in Switzerland). The book losses at the SNB will reduce the amount of the payouts to the Cantons, so the losses will be felt.
Switzerland is a small country with a GDP of about $600B. If the FX losses at the SNB were applied to the US economy, it would translate into a half-trillion dollar loss. That would be a very big deal indeed. The FX losses since September come to $2,000 for each and every Swiss citizen. The word “Shellacking” comes to mind.
I bring up this story to make a point. (Don't worry about the SNB) What happened at the SNB is because the SNB absorbed risk from the Swiss economy (the currency peg). As the SNB absorbs risk, it will, by definition, have to take losses from time to time.
The SNB has absorbed currency risk; other central banks have taken credit, liquidity and duration risk out of their respective markets. In the aggregate, the risk transfers have been massive. That’s why the global capital markets are so “calm”.
To me, the private sector looks “okay” for the time being. It’s the Public Sector that has the potential to produce a black swan over the next year or so. I conclude that the “confidence” factor is going to be an issue. The questions hanging in the air include, “Are all these governments really money-good?" "Are the key governments and their leaders able to maintain confidence in this fragile system?" "Are 'they' going to do the 'right' things?"
The world’s largest economy has just set itself up for a crisis in 60 days. China Inc. is sitting on a gazillion of dodgy loans. Japan Inc. is in hock up to its eyeballs (and is in the process of slow motion devaluation). The EU will, this year, be forced to make good on its promise of “Unlimited” printing. Where's the confidence in that pile?
This confidence “thing” is hard to anticipate. It comes and goes quickly. The year is starting out with a fairly high level of “warm feelings”. I’m not at all convinced that those feelings are justified. The list of things that could trip up the Public Sectors, and their deciders, is too long.
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someone paid to read shit someone wrote so they can make sure everyone can understand it
i dont understand either as it just sounds like another middle man taking a cut and making sure the producer and the consumer never get too close as there are a large portion of the population that needs to make sure they do nuthin and get sumthin for free AMAIRUHKA! FUK YEA!
Is everyone just "making bets"?
Or does anyone actually "invest" anymore? Or PRODUCE anything?
When all "investments" are leveraged bets predicated on other leveraged bets, all of it paper and with underlying production (IF any...) far, far below and ultra re-hypothecated in any case, is any WEALTH at all actually being created?
Mr. and Mrs. Mom'n'Pop mutual fund pensioners will have a big surprise one day...
Bring it down.
Its a game of theives and money changers. The Chinese were susposed to do the work but then they got all uppity and started their own money changing racket. Now everyone is in the business of theiving and money changing and people that used to work don't. Instead they want a cut of the action so they see what the Gov is offering. Of course the Governments don't want a revolution so they pay off the people that used to work to keep them calm.
The ship is all run out of gas at this point and gliding along with most of the passengers happy that no one has to work any more.
I like college, jogging and the Internet.
Enjoy it while it lasts. But be ready to fight because our lives are going to depend on it.
ready to fight?
why not just work? that is what most will do.
you plan on fighting for the right to not work? dont worry everyone will be able to do that - and get the same reward of such an endeavor in a much shorter time
"
Mr. and Mrs. Mom'n'Pop mutual fund pensioners will have a big surprise one day...
Bring it down."
Geeezzz...why do you wish to see such destruction of middle class wealth?
Do you have something against people putting their excess savings from their labor into a mutual fund so they can retire when they can no longer work? It not like Mom'n'Pop are buying derivatives and leveraging their 401k by 10x.
Direct your frustration towards WS, not Mainstreet.
No one wishes to see the destruction of middle class wealth. What you earned in actual work producing something of value and as valued in the marketplace when you produced it. The problem is not the workers who are productive. The problem is the method of storing that value. We used to have dollars that were used as rulers to see how many nuts we had stored in our silo. Then the governments got clever and decided to shrink the rulers. Now when you measure 401K it looks like you have 12 inches. But it is only 8 inches. Pretty soon it will really be 4 inches, and then two and then 1...
They took the nuts they skimmed when you weren't looking and played craps with them. Every time they blew the game they stole some more by shrinking the ruler. They did this right in front of your face. They did it through legislation. They did it through banks. They got everyone thinking that they can do it too, but no one told you.
The problem is that your Mutual Fund is using that same ruler - given to them by the government. Even if you see a 12% return (after taxes, fees, etc.) it will be a lie. Everyone in the game who answers your phone call is being handed the same shrinking rulers. Some of them know it. Some of them don't. Most don't care. They are too busy shaking the trees.
The only place you can store your nuts (store of past earnings or wealth) is in something not denominated by shrinking rulers. The choices are obvious and often stated. Celente had a good video over on American WatchDog with Greg Hunter.
USAWatchdog.com
What Kreditanstalt wants to end is the corrupt use of magically shrinking rulers. That will be a nasty business, but it is coming. In the mean time, get out of the financialization of rulers.
The End.
Spot on! That's why there can be no sound economy without sound money (money as a store of value as well as a medium of exchange) as savants like Ron Paul keeps trying to convey. And the historical sound money (store of value) is gold. And let me add that ponzis like fractional reserve lending should not be allowed either, even if backed by gold. That's all one can expect of life-that your work which hopefully reduces the entropy of the universe-is conserved. Trying to get something for nothing, gambling or speculation, is a zero sum game (actually less than zero with the financial "friction" of fees). But humans love the lure of the "free lunch". Otherwise, how can there even be a place like Las Vegas? Its completely irrational, isn't it? (People should know the odds are rigged against them and yet they still buy a lottery ticket or gamble. What a great tax on stupidity)
"why do you wish to see such destruction of middle class wealth?"
Because it never existed in the first place. It's all bets, speculation and made possible only by central banks and their cheap, printed "money".
Competing with cheap artificial "money" devalues the REAL wealth I and many others hold: real assets, stocks of companies that produce real things and employ people doing it, commodities, food, firewood, canned beans, and gold...
Why save anything when the speculators' funds are unlimited paper?
When the adjoining building catches fire, you're suddenly part of the problem.
only if i built my building of the same stix
many buildings are built of stuff that lasts a really long time and many of those buildings do not allow folks into them who know how to make buildings fall at free fall speeds
it is actually simple - for folks who think normally
Simply put, No. "Investment" and "Production" are too slow and not nearly lucrative enough. You can't leverage actually making something 100x. With money being completely abstract, you can do whatever you want, as long as you can convince people you've done something. That's where the money is, to the extent that it actually is anywhere at all.
Yeah, I agree with these other comments. After the ability to legally counterfeit the money supply gets well-established, as a privatized privilege, then that automatically runs away! There is less and less left as "capital" which can be "productively invested," which could still compete with the legalized counterfeiting, enforced by governments.
Indeed, to be consistent, one should change the fundamental concepts of economics, rather than still try to shoe horn the obsolete ideas into social facts that they can never fit back in. The basic realities are organized lies, operating organized robberies. All of the old "normal" ideas about economics were very special cases, restricted to limited circumstances, and then, only within that frame of reference.
The basic TRUTHS are that money is backed by murder, because the debt controls depend on the death controls. Governments have sovereignty which was based on the power to rob and the power to kill. The best organized gangs of criminals were able to covertly control governments, in order to legalize their lies, and legalize the violence to back up those lies. Thus, the financial system was always fraud backed by force. We are simply seeing that develop at an exponential rate, which is upsetting and overthrowing all of those people who liked to believe in the bullshit economic theories that were supposed to be based on notions like "capital" and "free markets."
What is happening globally is MORE AND MORE of this "making currency “bets” with the people’s money. It's taking some very big risks. In an attempt to diversify one risk, they are just adding different risks, and that effort is backfiring."
The powers to rob and to kill have been more than 99% privatized, because people do not understand that, and do not want to understand that. Therefore, the accumulating risk of out of control debts has its related growing potential for out of control deaths. Since the REAL money system is backed by murder, but that is mediated through a STATE RELIGION, and is an almost totally taboo social topic, we are constantly pumping more energy into the combined money/murder systems, in ways which are spreading more risk around to more people, in ways which ARE backfiring on an astronomically amplified scale ... and we ain't seen nothing yet!
dude--
i wanna bong rip of what you are burnin
if i could hear any fukin body i see in the real world speak such truth i would actually have hope for a the other fuktards i see in the real world
alas i am just a fuktard looking for a better bubba cush OG strain of purple indica that you seem to be hoarding
Wait. RM is on to something... or at least he triggered some understanding for me. But back up a second.
Bruce wrote:
What Bruce is saying is that Governments have been selling vol - exactly what e.g. the FRBNY is suspected of doing (selling VIX).
This "calms the market" - how?
Risk transfers always get hedged - "re-insured" if you like. E.g. VIX futures are bought by market makers who sell real puts and calls into the market, which are bought by the buy side... so the players are so effin' hedged - "collared" - they don't care if the market moves... so it doesn't move (see the recent piece by Artimis for this reflexive analysis).
Ditto the currency markets by the "unlimited purchase" promises of the ECB and the "infinite bid" against the EUR of the SNB, per Bruce's analysis. So bond markets have nowhere to go.
Now were do the Governments get that vol that they're selling?
Simple. From the barrel of a gun.
And so how do you short that trade? How to you short political will and stability?
Because if there was such a strategy, people should be flocking to it - taking "the other side" of the trade, motivated by the imbalance in the "political stability" market due to Governments leveraging their position (as it were).
And so is there a short? Yes.
It's called "prepping", and it's become very popular.
Bruce, many people are "on" to the game being played, even if they aren't cognizant of how the pieces fit together.
Humboldt homegrown, dude!
No one invests with excess fiat paper issuance, everyone is turned into a speculator, it was decried by Bergasse in France as far back as 1790. You could say that Ron Paul is the Bergasse of today or that Bergasse was the Ron Paul back then. Everyone ignored him, yet he was absolutely right on his predictions. http://gentlemaneconomics.wordpress.com/2013/01/01/does-the-knowledge-of...
There must be a difference between these "bets" and legitimate speculation. When the result is dependent on the direction of government intervention rather than on any shrewd assessment of supply and future demand, it seems to me to be pretty much a game.
"the difference is in the return on said investments." not to be too simplistic but with interest rates this low "getting a return" is quite the challenge. I have already argued "the easy money has been made." If you missed the equity and junk debt thing of the past three years...too bad. and for those who believe the answer to "more debt is more debt" don't be surprised if suddenly "there is FAIL." This is the most basic function of capitalism: "debt extinguishment." In short "bankruptcty." For all the bailouts what is hilarious is how many "authorities" are focused on "new lending." What if they focused on "debt roll-overs" instead? The bank know that he has a Government guarantee might take that guarantee "seriously" and say "hey, you've been irresponsible with credit...i declare you a threat to the taxpayer and will now fail you." this is the beauty of liquidation that they Keynsians don't talk about: the bank earns money by lending...so when there is a rash of bank failures he is eager to lend "at the next available opportunity." But when the "liquidation is refused" as has been done this time (via Government intervention) the bank might suddenly declare "any business of size to big" (as in risky because of so much money on the table) "and simply not roll over the debt." Obviously the Government has no answer to this...indeed might even precipitate such an action because now the Government itself has just starved itself of taxpayers. Think of it as a giant Boa Constrictor on some large Federal Agency or some massive "unfunded pension liability" (can't short it right?) with the moniker "go ahead and try and downsize now!" trust me..."that is no game." basically the only solution is to admit that "the money is all gone." in Japan "they learn to bow extra low" for those occasions.
Thanks Bruce. Few of us trade this stuff, so it's nice to have the perspective and per capita impacts. Well done all around.
Lauren Lyster was interviewing some guy a bit ago who reminded everybody that Timmay’s parting gift to the world is exempting foreign exchange swaps and forwards from the alleged new derivatives regulations..
That should help our cheesy Swiss sovereign simpaticos to manage their losses and keep the global Ponzi going.
http://www.youtube.com/watch?v=Tya-FeZFDfo&list=UU8eFERtcxPZ-M3Cxkh7zhtQ&index=24
09:45
The Gnomes of Zürich don't lose...Do they?
Bruce-you are one of the few here that actually writes with logic and with little emotions. Keep up the good work
Happy New Year
"It’s the Public Sector that has the potential to produce a black swan over the next year or so." I guess Bruce will have to amend his 2013 predictions...
amend predictions?
that would requiring looking in the mirror.
did yohs see the title, url and comments here?
accountability is only as good as the anonimity of the propaganda being sold/pushed/swallowed
looking back at predictions IS ONLY for high fives and "you are wrong cause i was right" kyle bass worshiping
Rated 5.
at first i was like ...
but then i was like SNB??!
excellent work, Bruce.